[Federal Register Volume 68, Number 31 (Friday, February 14, 2003)]
[Notices]
[Pages 7634-7635]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3716]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47333; File No. SR-CBOE-2002-18]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 Relating to its 
DPM Membership Ownership Requirement

February 10, 2003.

I. Introduction

    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 19, 2002, the Chicago Board Option Exchange, Inc. (``CBOE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend CBOE Rule 8.85(e). On 
June 10, 2002, the proposed rule change was published in the Federal 
Register.\3\ The Commission received one comment letter.\4\ On January 
23, 2003, the Exchange filed Amendment No. 1.\5\ The Commission 
approves the proposed rule change, as amended, and publishes this 
notice to solicit comments on Amendment No. 1. The Commission also 
approves Amendment No. 1 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 46020 (June 3, 
2002), 67 FR 39758 (June 10, 2002).
    \4\ See Letter from Margaret Wiermanski, Chief Compliance 
Officer, TD Options, LLC, to Kelly Riley, Senior Special Counsel, 
Division of Market Regulation (``Division''), Commission, dated July 
16, 2002 (``TD Options Comment Letter'').
    \5\ See Letter from Angelou Evangelou, Senior Attorney, Legal 
Division, CBOE to Deborah Flynn, Assistant Director, Division, 
Commission, dated January 23, 2003 (``Amendment No. 1''). In 
Amendment No. 1, CBOE clarifies that the term ``trading location,'' 
as used in Rule 8.85(e), is defined ``as any separate, identifiable 
unit of a DPM organization that applies for and is allocated options 
classes by the appropriate Allocation Committee.''
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II. Description of the Proposed Rule Change

    The CBOE proposes to amend Rule 8.85(e) pertaining to the 
Designated Primary Market-Maker (``DPM'') seat ownership requirement. 
Currently, the DPM seat ownership requirement,\6\ contained in CBOE 
Rule 8.85(e), requires each DPM to own at least one Exchange 
membership. The rule also provides that this requirement is satisfied 
if the senior principal of the DPM owned the required membership(s).
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    \6\ See Securities Exchange Act Release No. 43186 (August 21, 
2000), 65 FR 51880 (August 25, 2000) (Order approving File No. SR-
CBOE-99-37).
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    The Exchange now proposes to amend CBOE Rule 8.85(e) to make DPM 
seat ownership requirements applicable to each trading location (as 
opposed to each DPM organization). Thus, under the rule a DPM 
organization will be required to own a seat for each trading location 
in which a DPM organization serves as a DPM, as determined by the 
Exchange's Modified Trading System Appointments Committee (``MTS 
Committee'').\7\ Under the proposal the term ``trading location,'' is 
defined as ``any separate, identifiable unit of a DPM organization that 
applies for and is allocated options classes by the appropriate 
Allocations Committee.\8\ The proposed rule change also stipulates that 
each DPM organization will have ninety-days from the date of Commission 
approval to satisfy the new ownership requirements.
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    \7\ The MTS Committee is the Committee responsible for reviewing 
and ensuring compliance with CBOE Rule 8.85.
    \8\ See Amendment No. 1, supra note 5.
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    CBOE also proposes to eliminate the provision allowing a senior 
principal of a DPM to own a membership instead of the DPM organization 
for the purpose of satisfying a DPM's seat ownership requirements. 
Thus, each DPM organization would be required to directly own seats to 
fulfill the requirements pursuant to CBOE Rule 8.85(e).

III. Summary of Comments

    The Commission received one comment letter from TD Options, LLC 
(``TD Options'').\9\ TD Options expressed concern that the proposal: 
(1) Did not sufficiently explain its claim that the amendment to the 
DPM seat ownership rule would promote a long-term commitment to the 
Exchange, (2) did not provide sufficient rationale to explain why the 
DPM seat ownership requirement would no longer be satisfied by a 
principal's seat ownership under the proposal, and (3) lacked clarity 
with regard to the definition of ``trading location.''
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    \9\ See TD Options Comment Letter, supra note 4.
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    In CBOE's response to the comments from TD Options,\10\ the 
Exchange indicated that the proposal would ensure that DPMs have a 
long-term commitment to the Exchange because DPMs are allocated 
valuable securities by the CBOE, derive considerable benefits from 
those allocations, but currently do not have to pay for such 
allocations. Thus, the CBOE suggested that by amending its Rule 8.85(e) 
to align the DPM seat ownership requirements with the allocation of 
option classes, the DPM commitment to Exchange would be enhanced, and 
the likelihood of seat lease-related problems that could compromise a 
DPM's ability to open trading in its allocated option classes would be 
reduced. The Exchange also indicated that eliminating a DPM's ability 
to fulfill its seat ownership requirement through a principal ownership 
should enable CBOE to better monitor compliance with the rule, 
particularly in the present environment where individuals join and 
leave DPM organizations with increased frequency due to industry 
consolidation. In the CBOE Response Letter, the Exchange also explained 
that it was seeking to clarify what may be considered a trading 
location in instances where what physically appears to be two trading 
stations is actually one trading station, or conversely, where what 
physically appears to be one trading station is actually two trading 
stations. In Amendment No. 1, CBOE further clarified that the term 
``trading location,'' as used in this proposed rule change would refer 
to any separate, identifiable unit of a DPM organization that applies 
for and is allocated options

[[Page 7635]]

classes by the appropriate Allocation Committee.\11\
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    \10\ See Letter from Angelou Evangelou, Senior Attorney, Legal 
Division, CBOE to Marc McKayle, Special Counsel, Division, 
Commission, dated October 10, 2002 (``CBOE Response Letter'').
    \11\ See Amendment No. 1, supra note 5.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of 
the submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Section. Copies of such filing will also be available 
for inspection and copying at the principal office of CBOE. All 
submissions should refer to File No. SR-CBOE-2002-18, Amendment No. 1, 
and should be submitted by March 7, 2003.

V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission believes that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\13\ which 
requires, among other things, that the rules of an exchange be designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest.
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    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will require that a DPM own an Exchange 
membership or seat for every trading location, i.e., any separate, 
identifiable unit of a DPM organization that applies for and is 
allocated options classes by the appropriate Allocation Committee. The 
Commission believes that the Exchange's effort to ensure stability in 
its options market by amending the DPM seat ownership requirements is 
not unreasonable. By requiring each DPM to own an Exchange membership 
per trading location, the Exchange seeks to ensure a DPM's long-term 
commitment to the Exchange. The proposal should discourage entities 
from seeking short-term DPM appointments, which could be disruptive to 
the trading of allocated options classes, because DPMs will be required 
to make a substantial financial commitment to the Exchange. DPMs that 
own a membership in the Exchange should be more willing to invest the 
time, effort, and funding needed to build and foster a stable market 
place for the trading of their allocated options classes. This should 
provide enhanced trading benefits to investors by increasing liquidity 
and trading stability. Moreover, the proposal could help to preserve 
the integrity of the Exchange because DPMs will have a vested interest 
in ensuring that the Exchange maintains high standards.
    Further, the Commission believes that the proposed amendment to the 
DPM seat ownership requirement should provide incentives to DPMs that 
are allocated existing CBOE options, or seeking allocations in 
established option classes, to maintain sufficient capital to operate 
as a DPM, which should result in greater liquidity and investor 
protections in those options classes. The proposal could further CBOE's 
interest in securing long-term commitments to the Exchange because 
members that are committed to the Exchange should have greater 
incentives to ensure the orderly and effective operation of the market.
    The proposed rule change also eliminates the provision allowing a 
senior principal of a DPM to own a required membership instead of the 
DPM organization for the purpose of satisfying a DPM's seat ownership 
requirements. Instead, each DPM organization would be required to 
maintain direct ownership of any seats pursuant to CBOE Rule 8.85(e). 
The Commission believes that this requirement is consistent with the 
Act. In particular, the Commission believes that eliminating a DPM's 
ability to fulfill its seat ownership requirement through a principal's 
ownership could enhance the Exchange's ability to monitor DPM 
compliance with CBOE Rule 8.85 by helping to eliminate any confusion 
that may result from industry consolidation or a principal's leaving or 
joining a DPM organization. The Commission believes that by requiring 
the DPM organization to have direct ownership of the seat, the proposal 
could help assure the DPM's long-term commitment to the Exchange, and 
its willingness to invest the time, effort, and funding needed to build 
and foster a stable market place for the trading of its allocated 
options classes.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. CBOE 
filed Amendment No. 1 in response to comments it received after the 
publication of the notice of the filing of the proposed rule change, to 
clarify the definition of the term ``trading location.'' Because 
Amendment No. 1 is responsive to the commenter's concerns, the 
Commission finds good cause for accelerating approval of the proposed 
rule change, as amended by Amendment No. 1.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change, as amended, (File No. SR-CBOE-
2002-18) be, and it hereby is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-3716 Filed 2-13-03; 8:45 am]
BILLING CODE 8010-01-P